After decades of political mismanagement and civil war, Cambodia has recently begun to capitalize on its economic potential. Since adopting free-market economic policies in the 1990’s and increasing its integration within the international community, Cambodia’s economy has flourished. From 1998 to 2007, Cambodia’s GDP growth ranked sixth in the world (9.8%) and fastest in the Far East after China. Cambodia’s continued upward trajectory will be driven by several factors. Cambodia is resource-rich with newfound offshore oil and gas deposits in the Gulf of Thailand and mineral deposits in the northern provinces. Tourism is also growing quickly, as Cambodia is home to pristine beaches, world-class cultural relics (Angkor Wat) and a burgeoning eco-tourism sector. Cambodia also benefits from a young and cheap workforce, and a growing middle-class.
Stock Market:
The Cambodia Securities Exchange (CSX) was established in July of 2011 and is headquartered in Phnom Penh. The CSX held its first IPO of state-owned Phnom Penh Water Authority on 18 April 2012. The CSX finalized its second listing on the 16th June 2014 with garment manufacturer Grand Twins International completing its IPO. The market capitalization for the CSX was USD 195 million as of 30th June 2014.
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AFC Travel Report: Cambodia
In line with our process of being on the ground in the countries we invest in, AFC’s Regional Research Analyst, Scott Osheroff, discusses the development of Cambodia and its rural economic growth.
On 19th June 2014 Asia Frontier Capital co-hosted the Vietnam Investment Conference in Ho Chi Minh City Vietnam. Spending roughly nine months per year in Phnom Penh, Cambodia, I always leap at the opportunity to venture into the countryside to assess the rural economy, where the majority of Cambodia’s 15 million inhabitants live. So, rather than taking a plane to HCMC I opted for the overland route to see just how quickly Cambodia’s provinces are growing.
Travelling on the roads in Cambodia is always an adventure and the first step is clearing Phnom Penh’s incredible traffic. During my first trip to the Kingdom in 2012 traffic was hardly noticeable; now the streets are clogged with used Mercedes, Range Rovers and a plethora of other vehicles, providing a clear indication that there is a small, yet burgeoning middle class.
After forty minutes en-route I had cleared the Monivong Bridge on National Road One and was moving into Kandal Province, one of three I passed through to the border. Upon reaching the edge of Phnom Penh the scenery transition was abrupt. Shop houses and small foundries turned to rice paddies of a gorgeous shade of green, the likes of which I have only encountered in Southeast Asia. As the rainy season had set in the flooded fields and beginning of the rice planting season made for a stunning view.
Two hours in, having passed countless farms and the occasional dwelling, we came to an abrupt stop at the Mekong River. Cambodia not well known for boasting modern infrastructure, most of which has fallen into a state of disrepair over the past several decades, there is no bridge spanning the river. Therefore, we proceeded to the ferry to make our journey across.
Waiting in line to board the boat, hawkers of all sorts were peddling their goods. Once on board I took the opportunity to stretch my legs to interact with the locals, hoping this time they would have fried tarantulas on offer. With a dusting of chicken seasoning and a texture like soft shell crab they are an ever-so tasty snack for the road. Though I am sure our 8 legged friends are not everybody’s cup of tea I suspect few would be able to identify the origins of the flavoursome treat they were eating if it were presented to them with their eyes closed.
This part of Cambodia will soon be moving faster as the river crossing is about to get sped up with the completion of a USD 131 million world-class bridge being built by the Japanese. It is expected to be completed in 2015. The new bridge will expedite the transportation of goods and people leading to lower transit costs leading to a profound effect on growth as National Road Number One is the main road to Vietnam.
The Ferry and National Road Number One Bridge (behind) to span the lower Mekong
Once across the river we continued onward to Svay Rieng, a province bordering Vietnam. Driving through Svay Rieng has always been an interesting part of the journey for its downtown boasts a small square with farming statues and an eerie stillness which is reminiscent of scenes of small Mexican villages in the movie The Good, the Bad and the Ugly.
As Cambodia’s rural economic development continues it is not uncommon to see new buildings pop up. The latest addition was at the far end of the town square where a new Acleda Bank branch had nearly arrived. Acleda is Cambodia’s largest commercial bank and last month announced that it would re-invest USD 39 million in corporate profits into branch expansion. The bank was founded to service Cambodians living in the provinces and in Svay Rieng I passed three branches under construction and several others already adding clients in a largely unbanked country. This increased access to credit is expected to aid growth in the region as farmers mechanize and individuals seek modern forms of transit.
The demand for credit was evident as I passed downtown on the final kilometers to Bavet. Bavet is the industrial heartland of the Province, where two SEZ’s, the Manhattan and Tai Seng SEZ’s sit virtually across the street from one-another. There is an additional two dozen other projects under construction in the vicinity. With relatively inexpensive electricity provided by Vietnam the region is ideal for energy intensive industries which also need access to HCMC’s port.
This mini factory boom has not only stimulated the local economy, but has led to a swelling of the local population as regional Cambodians flock to Svay Rieng’s factories in search of stable employment. Thus, it made sense to see several real estate projects involving the build out of shop houses, villas and commercial properties on the highway well underway. I was surprised however by just how quickly this construction was occurring for it was non-existent during my last journey on this road, one year prior.
Moving past the SEZ’s, we descended on the center of Bavet which is a gritty border town with several casinos with oddly familiar names such as Le Macau Casino and Caesar International Hotel & Casino which cater almost exclusively to a Vietnamese clientele.
Border Casinos in Bavet
Having grown up in California I have always been enamored with how border towns can exist in stark contrast to one another across an imaginary line. Bavet being no different, on the Cambodian side, driving towards the border I came across bustling casinos, karaoke parlors and a few non-descript, but bustling local coffee shops. And one cannot forget the pothole laden roads which are falling into increasing disrepair. The Vietnamese side however was quite the opposite.
Having cleared immigration we began the home stretch to HCMC. Vietnam is described by some as being ten years more advanced than Cambodia, and every time I take this journey and cross the border it is easy to observe the future of Cambodia’s provinces. While at first glance the Vietnamese side doesn’t seem much different, a closer look yields larger buildings which are better constructed, newer and nicer cars in the driveways, more grandiose villas, and a relatively pothole-free road with sound infrastructure to mitigate flooding. Smaller items such as the clothes for sale and those being worn by locals are also of a better quality leading to the sense of poverty being less obvious.
Cambodia has a long way to go in its economic upswing and signs of mean reversion between Vietnam’s countryside and Phnom Penh are well under way. Previously minimalist countryside dwellings, these are slowly giving way to modern shop houses interspersed with luxurious accommodations. The occasional larger motorcycle speeds by, as does a new car and the quality of life seems to be improving as well, leading to more disposable income and a more stable existence.
Cambodia’s rapid economic growth of 7.2% in 2013, reported by the ADB, is expected to continue, leading to greater advancement in Cambodia’s provinces and move towards greater equality with the middle class of Phnom Penh.
AFC Country Report: Cambodia
2014 has been a tumultuous year for Cambodia’s garment industry, a mainstay of the economy that accounts for over 80% of exports and employs over 600,000 people, 90% of whom are women. On January 3rd, government forces opened fire on striking garment workers, killing five and injuring dozens more. The heavy-handed response received international media coverage and condemnation from human rights groups and from apparel companies that rely on Cambodian garment factories for production.
The source of the unrest was a call by garment labor unions to increase the minimum wage to USD 160. The government finally settled on a new minimum wage of USD 100, which the unions have thus far not accepted. Cambodia’s heavy reliance on its garment industry remains a questionable move from an economic standpoint. The garment industry flourishes on cheap wages and the industry’s razor-thin margins mean that manufacturers have an incentive to move production to cheaper countries like Myanmar or Bangladesh as Cambodian wages rise. At the same time, however, the industry is a key foreign exchange earner for Cambodia and has provided income and employment for many of the country’s rural residents who have traditionally been under-employed.
The January 2014 walk-out of workers cost the country’s garment industry an estimated USD 300 million from the sudden halt in production, and global clothing and retail giants Levi Strauss and Target have both announced their intentions to scale back production and sourcing from Cambodia as a response to the unrest that has occurred this year. To try and dispel the notions that the industry remains in turmoil, the Cambodian government is working with the World Bank and the International Labor Organization to reach a consensus on what is a fair minimum wage for the sector. To add fuel to the fire, the strikes among garment workers have become increasingly politically-charged, citing the country’s growing income inequality and building on the momentum of the political demonstrations by the opposition that occurred after the July 2013 national elections.
Despite the unrest, which began in December of last year, the garment sector grew 20% in 2013 to USD 5.5 billion, even with a 54% increase in the number of “labor days lost” in 2013 due to the December protests which continued into the New Year. Garment exports to the US were up 7.6% YoY and exports to the European Union were up 28% YoY.
Against the backdrop of growth in the garment sector and the simmering unrest, Grand Twins International (GTI), a Taiwanese-owned garment manufacturer that produces clothes for Adidas, decided to pursue an Initial Public Offering on the Cambodian Securities Exchange (CSX) in June, becoming only the second traded stock on the exchange after Phnom Penh Water Supply Authority (PPWSA) listed in April 2012. GTI shares began trading in June, receiving a lackluster response from investors in comparison with PPWSA’s successful flotation. The less-than-stellar demand from investors was attributed to the continued uncertainty of the garment sector, as many disputed issues remain unresolved. GTI sold 8 million shares (20% of the company) and raised USD 19.3 million, less than the USD 28 million the company had initially targeted. The capital raised will fund new factories and GTI’s expansion plans. The IPO date was pushed back numerous times due to delays in receiving necessary regulatory approval.
The CSX has been unable to attract other companies in Cambodia to list on the exchange, and some potentially-interested businesses are reportedly waiting until the bourse increases its market capitalization and gains liquidity before they proceed with IPO plans. To encourage more companies to go public, the CSX may need to work in conjunction with the Cambodian government to offer regulatory incentives and tax advantages to spur growth in the country’s capital markets. A lack of confidence in the Cambodian Securities Exchange will be a difficult problem to fix without upgrades in securities regulations and resolved technical issues. Some observers also wonder whether many of the local business groups would agree to the financial transparency that going public would entail, given that Cambodia is a country still plagued by corruption, with a large disparity between the rural poor and the business and political elite. One testament to the growing income inequality in Cambodia is that Rolls Royce, the luxury British carmaker, recently announced plans to open a showroom in Phnom Penh, despite the fact that the average income per capita in the country is only USD 950.
Tourism has been another strong contributor to the economy – in 2013, Cambodia received 4.2 million tourist arrivals, representing a 17.5% increase over the previous year. Overall revenue from the tourism sector rose to USD 2.5 billion in 2013, a 15% increase YoY. Siem Reap Airport, Cambodia’s busiest and the gateway to Angkor Wat, will undergo a USD 1 billion passenger terminal upgrade beginning in August 2014 that is expected to double the airport’s capacity to 15 million passengers.
The political unrest in neighboring Thailand has also affected Cambodia in recent weeks. New regulations imposed by the Thai junta aiming to crack down on illegal migrant workers in Thailand lead to the mass exodus of over 250,000 Cambodian migrant workers in late June. The influx of migrant workers into Cambodia has created significant challenges for both Cambodia and Thailand. Cambodia is trying to cope with the logistical task of handling the sudden return of more than 1.5% of its entire population. Thailand, on the other hand, will no doubt feel the effects of a shortage of manpower in its construction industry – it is estimated that more than half of construction workers in Thailand are from Myanmar and Cambodia. Thai factories and ports have also complained of the effects of a labor shortage and are anticipating delays in shipping delivery times and decreases in factory output. To address the problem, Cambodia is trying to lower passport costs and expand passport processing centers in Thailand to help many of the migrant workers return to Thailand to work legally. Many rural Cambodians depend on remittance inflows from migrant workers in Thailand, where wages are higher and employment is easier to find.
The events have complicated relations between Cambodia and Thailand. Cambodia’s longstanding Prime Minister, Hun Sen, has close ties with exiled former Thai Prime Minister Thaksin Shinawatra and Cambodia was rumored to be a potential asylum base for Thaksin in the aftermath of Thailand’s coup earlier this year. Hun Sen, however, was quick to play down such rumors and has not granted asylum to Thaksin.
A quick resolution to this mass exodus of Cambodian migrant workers is in the best interest of both countries. Cambodia doesn’t have the economic resources to deal with a sudden influx of over 250,000 people, and Thailand’s economy will certainly contract without the necessary workforce for its key labor-intensive industries such as construction, seafood, and manufacturing.
Although this year has seen its share of uncertainties with regards to the garment sector and Cambodian migrant workers in Thailand, Cambodia continues to register strong economic performance, with the Asian Development Bank expecting that GDP growth will rise from 7.2% in 2013 to 7.5% in 2014, primarily driven by an expansion in exports (primarily garments), tourism, agriculture, and construction.
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